FINRA's Latest Tinkering with the Code of Arbitration Procedure for Customer Disputes isn't the Solution
Scott Matasar
Financial Services Industry Litigation, Enforcement Defense and Regulatory Counseling Attorney at Matasar Jacobs LLC
An important change to the procedural rules governing arbitrations brought by disgruntled investors against financial advisors and their firms goes live shortly. But FINRA's latest tinkering only exacerbates the problem the SRO intended to fix.
Specifically, starting in 2017 FINRA Rule 12403 has been amended to increase from 10 to 15 the number of "public" arbitrator candidates for the parties to choose from when assembling their Panels. FINRA claims that this change will not affect the arbitration process because, along with the increase in public arbitrator candidates being provided, the amendments also increase the number of strikes to the public arbitrator list from four to six, keeping the proportion of strikes the same as under the current rule.
FINRA's effort to improve the arbitration process by increasing the parties' arbitrator candidate options misses the mark, and will actually degrade the quality of arbitration proceedings. This is because in reality, the effect of this rule amendment is to increase the total number of public arbitrators who potentially may be assigned to any given Panel from 6 to 9. Why is this an issue? Because the overall pool of public arbitrators is already so lacking in qualified candidates that the amendment to Rule 12403 will inevitably lead to arbitrators who are completely unfit to serve being appointed to Panels because parties will now lack a sufficient number of strikes to prevent it. Just by way of example, within the past year I have been presented with public arbitrator rank lists that included: a failed substitute teacher who has been unemployed continuously since 2009; the manager of the gun department at a Wal-Mart who lacks a college degree; and a career photographer with seemingly little to no experience with retail investing. While we should all appreciate these individuals' willingness to serve as arbitrators, the reality is that thanks to FINRA's amendment of Rule 12403, it will be even harder for parties to avoid placing their fate in such candidates' hands.
To be clear, this rule amendment is not detrimental just to the defense bar. Rather, whether claimants' counsel realizes it or not, this change harms their clients just as much. When FINRA litigators--whether for claimants or respondents--are selecting arbitrators they prize one quality over all else: predictability. Now, thanks to this rule counsel on both sides of customer cases are even more likely to wind up with an arbitrator on their Panel who is a loose cannon. This will inevitably make it more difficult for counsel on both sides to value their cases, to evaluate settlement proposals, to mediate effectively, and to prepare for Hearing.
Rather than amending Rule 12403, FINRA would have been better served to have devoted its energy to identifying and recruiting a large number of additional suitable public arbitration candidates. Now, like Forrest Gump's famous box of chocolates, lawyers on both sides of these cases are never going to know what their going to get when picking public arbitrators. This does not serve to improve the integrity of the process, and it certainly does not serve our clients' best interests.
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8 年The Law of Unintended Consequences. I have been a FINRA Non Public ("Industry") Arbitrator for over 20 years. About 10 years ago FINRA was pressured by the Claimants Bar to pilot a study where by mutual agreement Public Dispute (client v. firm/broker) panels could consist of 3 public arbitrators rather than 2 public and one non-public. Their argument was the non-public arbitrators like myself were generally shills of the industry and there only to protect the firms and brokers. My recollection of the study was there was a slightly higher percentage of award in the claimants favor granted in cases with 3 public arbitrators. I guess it was hard for FINRA to resist the pressure to change the rule allowing claimants to choose panels with 3 public arbitrators as the alternative was potential legislation banning mandatory arbitration in the securities industry. Since that rule change, I am rarely asked to serve on a panel involving a dispute with a member of the public, but continue to serve more frequently on industry disputes (employee v. firm and firm v. firm). Let me share some impressions about the public arbitrators. Historically they have come from 2 groups. Practicing and retired attorneys. Most of the practicing attorneys on these panels were also offering services in this forum. My impression is they were doing this to gain knowledge in the forum and/or the ability to advertise to potential clients that they were also arbitrators (kind of like an attorney being able to say they are also a judge). The retired attorneys I would assume were looking to stay active and pick up some extra money. The only downside was many of them had a large degradation of physical health due to advanced age and had problems with hearing, sight and in some cases staying awake, alert and even what I thought was mild dementia. Somehow the parties seem to choose a retired attorney as chair and in some cases the hearing becomes a free for all. I believe that recent rule changes have reclassified attorneys who currently practice securities arbitration as non-public. The second group is retirees. For some reason teachers seemed to be the most prevalent of them. Often they have little or no knowledge or understanding of the issues they are being asked to decide. So often I would be asked by a fellow arbitrator if I could explain to them things as simple as "why the value of a bond goes down when interest rates go up". Now on many of those panels there is nobody like me to answer that question. I wonder if all the panels are now able to render judgement on a reasonable understanding of all the facts. Speaking for myself, I never thought that my role was to be a shill for the industry. I have and continue to conduct myself with the highest degree of professionalism. I would like to think that was and is true of other non-public arbitrators. The bar got their way and for better or worse now they have to live with it. Michael Ross, CFP?